Anyone see this Seeking Alpha article?http://seekingalpha.com/article/367121-5-cefs-with-dividend-...What does the collective wisdom here say about the unintended consequences of taking advantage of the "too good to be true" yields in CEF's like these?disclosure: long a bit of DPD and GGN in my 401k.
What does the collective wisdom here say about the unintended consequences of taking advantage of the "too good to be true" yields in CEF's like these?If it's too good to be true, it is.If you want to gamble got to Vegas.
Well I suppose there's some collective wisdom in cliche's. ;^)CEF's from big houses are an interesting beast than the typical pink sheet tout though. For starters you get a fund below par due to the nature of how Closed End Funds tend to trade, they have some visible history making actual payouts, so...? What do the alligators in that swamp look like -- if one was to be on the look out for them instead of just staying out of bayou country?
I ran a chart on a couple of them. You'd be in for a very bumpy ride (unless Europe is quiet and tranquil ;-). Not what you think of with most of Dave Fish's Dividend Champions.HP
Well I suppose there's some collective wisdom in cliche's.Cliches are concise expressions of complicated truths. They became cliches because their obvious truths (when applied correctly) were repeated so often. That doesn't make them untrue, just gives people an easy excuse for ignoring them ... at their peril. David's list of dividend payers offers a safe way to wealth (Slow and stead wins the race.) but if you insist on gambling just remember: All that glitters is not gold.People could offer you detailed pro's and con's on this, but it seems you are intent on gambling with your retirement so just remember "I told you so."Desert (excuses are what people use to justify what they are going to do anyway) Dave
FWIW, I don't recollect communicating an intent to gamble on anything. The question is about understanding the risks implied in those high CEF yields. Yep, the chart history of these CEF's is interesting. They suggest a caution and an opportunity. Maybe CEF's are just beyond the ken of us Foolish mortals and the true risks will have to remain one of life's unanswered mysteries. As an aside @DD, Thanks for the "High yields will kill you" reminder. Except when they don't. Question of the day is "Is this the former or the latter?" Is there a market inefficiency associated with CEF's to exploit?
"I ran a chart on a couple of them. You'd be in for a very bumpy ride (unless Europe is quiet and tranquil ;-). Not what you think of with most of Dave Fish's Dividend Champions."For sure. Point of order: Am I in the wrong room? This is the identified as the "Dividend Growth Investing" board. Is it limited to the "Dave Fish Dividend Champion" board? I love his work and rely heavily (re: HEAVILY: mid-6 figure heavily) on it. Is there some limit as to how "safe" a dividend strategy can be investigated and discussed here?
Is there some limit as to how "safe" a dividend strategy can be investigated and discussed here?Nope! None that I know of.And I suspect David would be the first to tell you there are no guarantees with any of the stocks on the list, but (getting back to Vegas) the odds of an old dividend paying stock surviving are better than with young or middle aged stocks that haven't gotten old and established enough to start paying dividends yet. With old established dividend paying stocks (I choose mainly US dividend paying utility stocks 'cause politicians are unlikely to let their constituents die of thirst or freeze to death in the dark.) you are dealing with a CEO and board of directors that's unlikely to take a flying leap at some new investment du jour.There's a theory that young people should take chances with their investing 'cause they'll have time to recover from their mistakes.Fair enough, but I choose to buy the safest stocks I can find and let the dividends pile up. In my never so humble opinion 10, 20 or 30 years from now my PNY ( http://boards.fool.com/i-recently-started-one-with-pep-and-a... ) dividend paying stock will do better than the stock picker's average for the same time period.Of course you might pick the next Apple, Microsoft or Berkshire Hathaway. That's what the stock brokers will tell you anyway.And that's what Las Vegas tells the gamblers too. I travel to Las Vegas regularly and eat great food in famous restaurants at prices less than I'd pay for the same dishes in New York or LA because the gamblers are picking up part of my tab. The gamblers help pay for my luxury hotel rooms also.As I told my wife once, many years ago, when she was thinking of gambling at one of the casinos: "If the gamblers have such a good chance of winning, how did they afford to build this place?"As the cliche' goes: "You pays your money and you takes yo' chances."Good luck!
There's a theory that young people should take chances with their investing 'cause they'll have time to recover from their mistakes.That's the conventional wisdom, but I think it's more a case of offering condolences to the youngsters who had previously been told, "Oh, sure, you want to play in traffic...go ahead, enjoy yourself."The flip side is that young people have the most of a valuable element to compounding: time. Many of us old-timers would gladly trade some of the success we've had for that one element. And to the extent that we've enjoyed compounding with some great stocks, just imagine how that extra time would step up the benefit of compounding by a few notches if we had started in our 20s or 30s...let alone starting off a todler or teenager with a few companies like Coke or AFLAC!Recover? Why not do it right in the first place?
my experience has been that CEF's are not worth buying with the return of capital on a lot of them being so high......they are paying me back with the money I put in. I'll just keep my money and invest it in div.paying stock and I especially like the 15% tax rate div. stocks, but I don't limit it to those.LD
Thank for the substantive comment LD
You have to look at CEFs very, very carefully and most of the time the yields include a return of capital. Still, there are occasionally evry good buys in the CEF world. This is a nice example:http://lifeinvestmentseverything.blogspot.com/2012/02/jqc-pr..."In a prior post (http://lifeinvestmentseverything.blogspot.com/2012/01/how-to...), I explained how I scan the world of closed end funds (CEFs) for bargains. Usually the realization of excess value requires patience, and the time you must wait can extend well over a year. However, from time to time an opportunity presents itself in the CEF world which offers a far more timely excess return. The Nuveen Multi-Strategy Income & Growth 2 fund (ticker JQC) offers just such an opportunity for excess potential returns which are likely to emerge within a relatively short period of time."
CEF 'income' funds are for suckers. These retail (no professional institutional money managers here) typically highly leveraged and very expensive products are usually marketed to the least sophisticated individual investors who are drawn to the marquee 'double digit' yields. Gradually declining distributions, distributions of capital, extreme interest rate volatility, obscene expense ratios and a gradually declining NAV are nitnoy details lost to those who seem obsessed with nothing more than current yield.BruceM
dFishI wonder what you think of RRD? Barron's gave it a very high rating so we have bought a couple hundred shares. It is paying close to an 8% dividend. You can pick it up for about $13.50/sh. Back in 2007 it was selling at close to $50/sh. Like some drug stocks like MRK and PFE, maybe this will bounce off its low though not nearly approaching its all-time high ($100/sh for MRK and $50/sh for PFE).brucedoe
Bruce,I can't really say that I follow RRD very closely. It seems to be a top choice in its industry, but that industry seems to be in decline. (I generally avoid such industries.) It's possible that the industry cycle has bottomed and results should begin to improve, but it would be wrong for me to claim to have any particular insight here. In any case, best of luck with RRD!
Here's a link to another recent piece about RRD...http://www.theonlineinvestor.com/income_investors/
The closed-end funds you are referring to follow a strategy of selling covered calls. You need to first understand what that strategy entails before investing. An example is selling 10% out of the money covered calls in return for a premium. If the stock goes up more than 10% you don't get the gain beyond that amount. If the stock goes down you still incur the loss. When talking about a portfolio, you aren't getting the occasional 100% gainer to offset the losers. Whether that is worth it or not depends on how much premium (a.k.a. money) someone is going to give you in return for that right. The more volatile the market, the more premium people are going to be willing to pay. So one strategy is to buy these funds when volatility is high and you expect (or hope) it is going to decline.So you get 10% or so in income in return for giving up gains. In a slowly growing environment you give up little as the out of the money options you sold expire worthless. But in times like 2008, you take all the losses of the S&P500 but don't get the follow on gains from 2009. This is because you sold call options so someone else got those gains. Check out the chart on any particular option strategy CEF and you will see what I mean.These funds can be leveraged both providing more income (example borrow at 2% and yield 10% from that money) but in a downmarket this leverage is significantly more risk (e.g. many closed-ends were forced to sell at market bottoms in early 2009 because they got margin calls). Also CEF's frequently trade at a discount thus providing more income (example if trading at a 10% discount then a 5% yield at NAV becomes a 5.5% yield at purchase price). Additionally, covered call CEF's are quite tax efficient as the money from the covered calls is considered a non-taxable return of capital. Thus with each distribution your purchase basis declines and you only owe tax when the investment is sold. There's typically little to no tax on the income. You pay the tax when you sell the CEF.Traded CEF's will typically trade at a discount. So in general you don't buy new or not yet traded CEF's because you pay full price (plus a hidden commission) and once they are traded they will probably be at a discount. Buying a non-traded fund is almost always a bad idea. Instead you want to buy CEF's when you expect the discount to get smaller. Go to cefconnect.com, see what the high, low, average and current discount are and make a decision on whether you expect the current discount to decline. Also pay attention to the management fee, they tend to be much higher than a typical mutual fund, so you got to decide whether it's worth it.In general, CEF's can be quite interesting investments when the strategy they are currently following is unpopular. This is because not only are the underlying assets it holds "at a discount" but you get the further discount on the CEF itself. This creates the potential for a multiplier effect should the asset gain in popularity. A muni bond CEF I bought "when rates are rising and everyone knows they will continue to" yielded tax free 12% for a few years and had a capital gain exceeding 13% per year because low and behold, what everyone knew was exagerated.I bought a covered call ETF a few weeks ago for the following reasons:1.) I am OK with S&P500 type risk even one which is leveraged 25% (the income offsets some of the leverage risk and effectively you are making a spread between short term borrowing cost and option yield income). This is a small portion of an overall portfolio that would have otherwise been in a S&P500 ETF.2.) It was a taxable account and the holder in all likelihood will never sell thus never paying the tax. In this case, I expect her to pass away one day still holding the stock. I don't really care that the estate will pay the tax.3.) The discounts on the ETF were much higher than average (without this, it's usually better to just buy a regular fund that follows the same strategy.) CEF's do typically come with higher management fee's so it's a trade off. Note you can by something yielding 15% at NAV with a 15% discount thus gaining an extra 2.25% yield, this can be thought of as more than offsetting a 1.5% management fee. Additionally that discount (see story above) can narrow giving you not just the gains on the underlying assets by a multiplier effect.4.) Long term capital gains are of minimal value to the holder (note probably not a good inflation hedge).5.) I have some reasonable expectation of less volatility in the future than the recent past. 6.) I have some reasonable expectation of a an increasing popularity for yield assets at better than governement bond rates because the fed is forcing it and because baby boomers need it.For all you people saying high yield, scary, rule it out before looking deeper, etc. I think you are making a mistake. A well diversified portfolio of risky and less risky investments can have less overall risk than say 500 individual well known stocks that all happen to be domestic large caps or a portfolio of all treasury bonds (inflation risk) or one well known stock. Was GM in 2008 really less risky than than a portfolio of high yield bonds? Would an S&P500 fund be less risk than one of say preferred REIT's, covered calls, MLP's, mREIT's, etc. Look into it, then if you decide it isn't worth it, then rule it out. Don't just assume, oooh high yield, too risky.
FYI I bought EXG about 6 weeks ago. It's discount has narrowed a little but it's currently trading at an 11.5% discount to NAV which is about average for this CEF. It yields 12.5% with the discount juicing the yeild about 1.4% (= 12.5% * 11.5% discount). The management fee including other expenses is 1.05% so the extra yield due to discount more than pays for the management fee. The yield was 85% tax free last year (return of capital due to covered call selling) and 15% taxable at income tax rates. When sold there will be tax due on that 85% that wasn't taxed, probably at long term rates. When / if the funds discount declines to 8% or less, I will re-evaluate.
Thanks for the comprehensive treatment of the topic Sailrmc.fwiw, Yes thanks for discussing their selling of covered calls and the tradeoffs with current income vs cap'd gains in an up market. In fact, that's one of the things that caused me to stop and look a bit closer at that article and the funds. I've been generating a bit of cash on a couple of my stocks with covered calls. 1% a month or so from CC's on a longterm held stock or ETF (while I also collect their dividends) is just fine with me. That's also in line with me two smallish positions in DPD and GGN which both generate income selling covered calls.In anycase back on point...It occurred to me from the SA article that possibly, compared to an individual issue, the high yield risks is mitigated to a degree by a CEF basket of stocks, with understanding some of the yield is from covered calls and with active management by fund managers. The question then is whether the remaining risks are mitigated to an acceptable extent. Your thinking on that is helpful. I'll be ruminating and cogitating on it a while for certain.
dFishThanks for the article. I'll stick with RRD.brucedoe
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